高露潔 (CL) 2014 Q2 法說會逐字稿

Good day everyone, and welcome to today's Colgate-Palmolive Company second quarter 2014 earnings conference call.

P This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

Today's conference call will include forward-looking statements.

These statements are made on the basis of the Company's views and assumptions as of this time and are not guarantees of future performance.

Actual events or results may differ materially from these statements.

For information about certain factors that could cause such differences, investors should consult the Company's most recent annual report on form 10-K filed with the Securities and Exchange Commission and available on the Company's website.

Including the information set forth under the [captions] risk factors and cautionary statement on forward-looking statements.

This conference call will also include a discussion of non-GAAP financial measures which differ from the company's results prepared in accordance with GAAP.

The company will discuss organic sales growth, which is not net sales growth excluding foreign exchange, acquisitions, and divestitures.

The company will also discuss gross profit, gross profit margin, SG&A as a percent of net sales, operating profit, operating profit margin, net income, and earnings per share on a diluted basis excluding the impact of these items described in the press release.

A full reconciliations with the corresponding GAAP measures is included in the press release and is posted in the For Investors section of the company's website at www.colgatepalmolive.com

Just as a reminder, there will be a slight delay before the question-and-answer session begins due to the web simulcast.

Now for the opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, Bina Thompson.

Please go ahead, Bina.

And thank you, Angela.

Good morning and welcome to our second-quarter 2014 earnings conference call.

With me this morning are Ian Cook, President, Chairman and CEO; Dennis Hickey, CFO; Victoria Dolan, Corporate Controller; and Elaine Paik, Treasurer.

We're happy to report another quarter of good organic sales growth with every division participating.

Consistent with other companies in our industry we are facing increased macroeconomic pressure in certain areas of the world.

Category growth has slowed somewhat in geographies such as Asia, a factor which we actually referenced last quarter.

On the other hand, we see some encouraging signs of slow recovery in some European markets.

Competition remains healthy and promotional battles continue.

However, our new product pipeline is as full as ever and our commercial investment behind our launches has increased worldwide.

A careful balance between media spending and in-store activity.

And this has resulted in solid market shares, growing in many categories and geographies, and showing positive trends in the most recent period.

Our Global Growth and Efficiency Program is on track and savings from that are supplementing our ongoing funding the growth initiatives.

Which are as healthy as ever.

Both of these contributed to our 20 basis point increase in gross margins.

Offsetting these savings, were increases in raw and packaging material costs as well as continued foreign currency transaction pressure.

Our three business service centers around the world are now up and running.

In Warsaw, Mexico City, and Mumbai.

The hubbing activities are complete in Europe and are well underway elsewhere in the world.

Which will make us even more nimble and effective winning on the ground.

And of course, our balance sheet is strong and cash generation is solid.

So let's turn to the divisions.

Starting with North America.

Organic sales growth in North America was modest, the volume growth of 2.5% was of course on top of a very robust increase in the year-ago quarter of 6%.

Reflecting the initial launch of Colgate Total Mouthwash.

We have an exciting innovation launching as we speak which I'll discuss in a moment.

Pleasingly, versus the second quarter of 2013, our 2014 second quarter shares increased in toothpastes, toothbrushes, deodorants, bodywash, and fabric conditioners.

And our mouthwash share held steady at about 6.5%.

Trial and repeat numbers for Colgate Total Mouthwash are above previous recent competitive launches and the product has been instrumental in driving overall category growth.

Our recent launch of Suavitel Fast-Dry Fabric Conditioner has also met with success.

Our quarterly national share is at a record 18.6%, up 170 basis points versus the second quarter of 2013.

And this is a product which is largely sold in Hispanic markets, where it holds a 36.2% share on a year-to-date basis.

Fast closing the gap between us and the leading competitor.

So looking ahead, our latest toothpaste innovation here in the US is Colgate Enamel Health Toothpaste.

The enamel strengthening segment is the fastest-growing in the toothpaste category with 54% of consumers concerned about enamel.

This new product replenishes natural calcium and other minerals back into weakened enamel, filling in rough spots while at the same time polishing the enamel surface so germs are less likely to stick on the teeth.

The formula has an active fluoride system along with gentle-on-enamel silica and the product comes in 2 variants, whitening and sensitivity relief.

In addition, the impactful packaging is interactive with a touch and feel demo showing acid soft and rough enamel and healthy smooth enamel.

So as you would imagine, we have a very robust integrated marketing campaign planned including television, print, public relations, professional, digital, social, mobile and in-store activities.

Turning to Europe South Pacific.

We are very encouraged with our progress in Europe and are cautiously optimistic that some of the macroeconomic headwinds we have been facing are beginning to die down.

Our organic sales growth of 2.5% reflects the balance between volume and price where we have had strong promotional activities across the region to support new product launches.

And this has paid off in terms of market share.

Our oral care shares are strong across the category and showing good momentum.

In toothpaste, our year-to-date market share is at 35.2%.

Up 70 basis points from the year-ago period.

With the most recent share at 35.4%.

And of particular note is the UK, where despite an ongoing competitive battle, our year-to-date share is just shy of 50%, up 1 full point with the most recent read over 51%, a record high.

In manual toothbrushes, our year-to-date regional share is up 90 basis points to 23.5% with the most recent read at 24%, consolidating our number one position.

And this was in part fueled by excellent progress in the UK where we've achieved a record 37.5% share year-to-date.

And in mouthwash, our share is up 10 basis points to 16.4% on a year-to-date basis with the most recent read at 16.9%.

We're very excited about the launch of Colgate Maximum Cavity Protection with Sugar Acid Neutralizer across Europe and the South Pacific.

First quarter launches in Australia and Norway have achieved 3.7% and 3.5% shares respectively in the most recent period.

We've only just launched the UK where as I mentioned, we're reaching record market share levels.

And we will introduce the product of across the rest of Europe in the balance of the year.

In Germany, where our share is up 140 basis points, to 41.2% on a year-to-date basis, we've launched it under the Elmex brand.

More new products are planned for the second half of this year as well.

We will continue the rollout of Colgate Max White One Optics; whitening is the second biggest segment in toothpaste in Europe and we hold the number one position.

Similarly, in manual toothbrushes, we will continue the roll out of Colgate Slim Soft Charcoal Toothbrush, a product which as you know was developed in Asia but is met with great success and other parts of the world.

An innovation in the mouthwash category is Colgate Plax Deep Clean Mouthwash, which provides a deep, effective clean even in hard to reach areas.

The product contains two natural ingredients, eucalyptol and propolis, that are well known to the consumer.

Eucalyptol is known for cooling and antibacterial properties and propolis for its protective properties.

Turning then to Latin America.

We're very pleased with the continued strong organic sales growth in this region.

This growth was broadly based.

One exception was Brazil where our consumers were glued to their televisions during the World Cup and not spending time in stores.

A temporary condition which we expect should reverse itself in the second half of this year.

Market shares continue to climb.

In the press release we cited record toothpaste shares in a number of countries.

Our year-to-date manual toothbrush shares also achieved record highs in Brazil, Chile, Peru, Puerto Rico, and Uruguay.

In Brazil, Colgate Maximum Cavity Protection with Sugar Acid Neutralizer Toothpaste has achieved a 2.3% share year-to-date.

Lifting our overall share to a record 71.9%.

In Mexico, our toothpaste share has been over 80% for the last three months.

And while we don't have readings yet in national Nielsen shares, Colgate Maximum Cavity Protection with Sugar Acid Neutralizer Toothpaste in Mexico has registered a 3 point share in Scantrack.

And as in another regions around the world, the launch of Colgate's Slim Soft Toothbrush has met with success in Latin America.

In Brazil, our share is up 80 basis points to 32.8% year-to-date on the strength of both Colgate 360 and Colgate Slim Soft, both of which are super premium priced, helping to increase margins.

In Mexico, our manual toothbrush leadership share climbed to a record 44.9% in the most recent period.

And our mouthwash share across the region is up 30 basis points to 36.3% while our principal competitor is down almost 1 full point to 38.8%.

In the personal care category, we've increased our underarm share in Mexico as a result of new products, such as Men's and Ladies' Speed Stick Stress.

We're now the leader in bar soaps across Latin America with Protex and Palmolive holding the number one and two positions respectively.

And in fabric conditioners, our regional share is up over 2 points to 50.8% year-to-date with the most recent read at 51%.

And more innovation is planned for the second half.

During the third quarter, we will be launching Colgate Total Professional Breath Help Toothpaste.

Dentists advise their patients that bad breath can be caused not just by food odors, but also by the accumulation of bacteria in the mouth.

This breath freshening toothpaste formula with breakthrough neutral odor technology is scientifically proven to fight and neutralize bad-breath-causing bacteria.

Next month we're introducing Colgate Luminous White Instant Toothpaste.

It's exclusive formula with optic brighteners activates while you brush for a visibly whiter smile instantly.

And in the personal care category this month we're launching Lady Speed Stick Aclarado Perfecto with vitamin E. It's formula, with vitamin E and pearl extract was perceived in the consumer test to help restore the skin's natural tone while also providing sweat protection for up to 48 hours.

Turning then to Asia.

While organic sales growth in this region slowed from the first quarter pace, this quarter was compared to the strongest quarter of last year, which saw organic sales growth at a very strong 13%.

Macroeconomic factors in China affected our results.

And we told you on our last call about some categories slowing and in fact that did happen.

However, as referenced in the press release, we continue to see strong growth in other countries in the region, such as India.

And innovation continues to help drive market share increases.

In toothpaste, our market share in India is up 70 basis points on a year-to-date basis to 54.8% with the most recent period at 55.1%, and this in the face of recent competitive entries.

The revitalization of Colgate Active Salt, a toothpaste with the unique salt formula that gives deep clean feeling and helps fight germs for strong teeth and healthy gums helps drive these results.

In Malaysia, our share increased 50 basis point to 73.5% year-to-date with the most recent read at 74.5%.

This was our first Asian market to launch Colgate Maximum Cavity Protection with Sugar Acid Neutralizer Toothpaste.

And in just six months, it's achieved almost a 4% share of the market.

Our toothbrush share across the division is up to 30.6% year-to-date fueled by increases in India, Thailand, Philippines, Malaysia, Singapore, and Taiwan.

In India, new products such as Colgate SuperFlexi have resulted in an increase of 240 basis points to 43.5 % year-to-date with the most recent read at 43.7%.

Our mouthwash business is solid as well, with the regional share year-to-date of 21.8%, up 110 basis points.

Colgate Plax Jasmine Tea, a mouthwash which provides long-lasting fresh breath with a pleasant Jasmine tea flavor, has contributed to very good results in Thailand and the Philippines where total mouthwash shares are up year-over-year 170 basis points and 380 basis points respectively.

Colgate Plax Herbal Salt Mouthwash, which was launched in Malaysia and Singapore and contributed 80 basis points and 250 basis points respectively in the initial read, will launch in India as Colgate Plax Active Salt during the fourth quarter.

As you may know, the Indian consumer habit is to rinse one's mouth with salt water, so this innovation should resonate well in this market.

Of course, more innovation is planned for the second half of this year; we will continue to roll out Colgate Maximum Cavity Protection with Sugar Acid Neutralizer Toothpaste; in China, will be launching Colgate Tea-Help toothpaste which provides refreshing breath with a pleasant longjing tea flavor.

Longjing is a popular and premium type of tea in China which is associated with multiple types of benefits, including healthy teeth and refreshing breath.

We will also be launching the Colgate HD1 toothbrush with 7-way cleaning, with the following benefits: cleans teeth surface, removes bacteria, is gentle on gums, cleans in between the teeth, absorbs brushing pressure, and is easy to maneuver.

And in Thailand, we will be launching Colgate Plax Tartar Control Mouthwash.

An exciting addition to our strong mouthwash portfolio in that country.

This mouthwash provides the dual benefit of tartar control and breath freshening all at once.

Turning then to Africa-Eurasia.

We're encouraged with the continued solid organic sales growth in this region; of particular note was Russia, where despite an uncertain political and macroeconomic environment, new products such as Colgate Altai Herbs Toothpaste, Colgate Total Interdental Toothpaste, and Colgate OpticWhite Instant Toothpaste helped drive strong growth.

Toothpaste and toothbrush shares remain solid across the region.

Innovation in the mouthwash category has delivered good share results.

In Russia we told you last quarter about Colgate Altai Herbs mouthwash which contains an ingredient well-known to the local consumer.

A comparison product -- companion product -- to the previously mentioned toothpaste.

Our mouthwash share in Russia is up year-to-date 170 basis points to 27.5%.

In Turkey, our newly-launched Colgate Plax Green Mouthwash has resulted in a market share increase of 120 basis points to 20.5% year-to-date.

And we're also very pleased with the continued success in our shower gel business across the region, where we hold a leadership position of 22%, up almost 2 full points year-over-year.

Palmolive Gourmet Spa has driven increases of 220 basis points and 400 basis points in Russia and Turkey respectively.

And the recent launch of Palmolive Thermal Skin Renewal resulted in an increase of 5 points in South Africa.

More innovation is planned.

In the Eurasian markets we're introducing Colgate Total Pro Whitening Toothpaste.

And here, as elsewhere, the premium priced whitening segment is very important to the overall toothpaste category.

In Russia, consumers believe in the power of natural ingredients and traditional recipes to improve oral health.

Accordingly, we're launching the Colgate Natural Extracts Toothbrush containing pinetree bristles with premium differentiated and impactful packaging designed to stand out on shelf.

As I mentioned earlier, our Palmolive Gourmet Spa line of shower gels has been very successful and we hope to build on that success with two new variants to be added to the existing chocolate, vanilla, and strawberry.

The new creamy coffee and peach sorbet variants are infused with natural extracts and their creamy formulas smooth the skin.

As you would expect, we will have a very strong integrated marketing campaign to support this launch.

Then turning to Hills.

Hills business continues to be solid.

General softness in the pet superstores has been affecting us and others as well here in the US; however, we're encouraged by our continued stream of innovation, which we expect to drive growth going forward.

Our rollout of Hill's Ideal Balance continues to meet with success; here in the US our share of the naturals category continues to grow.

And in addition to the regular Ideal Balance, we launched Ideal Balance Slim and Healthy in the second quarter for both dogs and cats.

Support activities included features in coupon brochure handouts, brand ambassador coupons, and nutritional consultant coupons.

In Europe, we launched in the UK and Germany in April and May respectively, and so far, we've seen very good trade acceptance with listing in the major accounts supported by promotional activities as well as secondary placements.

In the store, we activated with branded gondola ends, demonstrators in key accounts, and indoor and outdoor posters and point-of-sale materials.

And in addition, we featured the product at consumer pet shows and two testimonial campaigns.

On the therapeutic side of the business, our 2013 launch of Prescription Diet Metabolic continues to do well both here and abroad.

In the US, our sales are exceeding our expectations.

Our commercial support includes before-and-after imagery along with videos online.

And this quarter we've globally launched an antioxidant upgrade to the product.

In greater Europe, we've widened the gap between our nearest competitor from 2 points to 8, establishing a clear leadership share of 47% year-to-date in the weight category.

Another important therapeutic category is feline urinary, a category where we were underrepresented.

Until the launch of Prescription Diet CD.

New platforms such as Efficacy, Stress, Ocean Fish, and Stew were added in the second quarter here in the US, all supported with in-clinic sampling and messaging at professional conferences.

Similar activities in Europe have resulted in a 130 basis point increase in our share of the category to almost 30% year-to-date.

Looking forward, this quarter we will continue the rollout of Ideal Balance Slim and Healthy and Science Diet Perfect Weight, our new wellness weight-loss product in markets outside the US.

And for the fourth quarter, we have more exciting news which we will share with you soon.

So in summary, we are pleased that we continue to drive organic sales around the world with good bottom line growth, our new product pipeline is as full as ever and our market shares are healthy and growing in many regions.

Colgate people everywhere are working hard to keep us winning on the ground.

We look forward to sharing our results with you as we go forward through the balance of the year.

And now before we turn it over to Q&A, Ian would like to make a few remarks.

Ian?

Thanks Bina.

Many of you may remember that on the first quarter call as we began the Q&A, I took the time to make some preliminary remarks on the shape of this year and it seems appropriate to open by doing the same in this quarter.

Clearly, we saw a slowdown in the top line pace of the company in the second quarter and that really began towards the very end of the quarter.

And as you break that down, one contributing factor is further emerging market weakness in our categories as we see the macroeconomic weaknesses finally come more sharply to our categories.

You will recall, on the first quarter call, that we revised the category growth rates for the emerging markets down to a 5% to 7% range from the previous 6% to 8%, and based on what we saw in the second quarter, we see for the balance of the year those emerging markets still posting good growth, but at the lower end of that range.

And the developed markets, for the Colgate businesses, category growth continues at 1% to 2% with some growing optimism, I would say, in Europe.

Hills, as you heard, experienced channel-specific slowdown here in the US, which we are already seeing recover as this quarter begins.

As you heard very clearly from Bina our market shares around the world continue to be strong and accelerating in Mexico and the US, two particular geographies that we were focusing on since the beginning of the year.

And our innovation pipeline is deep and rich, not just for the balance of 2014, but into 2015 as well.

We continue to feel that the strategy we have been deploying for several years, a strategy that focuses on building brands with our consumers, creating innovation that drives growth, maintaining the efficiency and effectiveness that funds that growth, and developing a cadre of leadership to continue to manage the company continue to be the right strategy, as does our execution on the fundamentals of our business around the world.

We believe both remain correct and that is what we are redoubling our focus on for the balance of this year.

So with that, as a backdrop, while we continue to expect organic growth for the company this year, to be in that 5% to 7% range albeit towards the lower end of that range, given the current world environment.

On the material cost side, we have seen further increases in material costs, including tropical oils and several of the agricultural commodities that affect the Hills business, and of course, the continued transaction headwinds due to foreign exchange.

And because of that, we now see gross margin expectations for the year move to a 30 to 50 basis point range, with funding the growth maintained at historically strong levels, as you will see when I go through the gross margin, roll forward, and of course more pricing across the balance of the year.

Behind that strong innovation stream, advertising, and the increasingly important commercial investment of in-store work will both be up.

The restructuring program remains on track, and we continue to expect after tax savings of between $90 million and $110 million, and our tax rate as you would expect remains in the 31% to 32% range.

As you saw in the press release, we remain comfortable with our 4% to 5% dollar EPS range and you may recall the walk-through that we provided on our first quarter call, which guided to the middle of that range; guidance that I would reiterate.

So in summary, we believe the strategy that we are deploying and the focus on the fundamentals that we have remain the right ones.

Our market shares are strong.

Our innovation is robust.

And I think we can continue to demonstrate the agility and the flexibility to react to the volatile world that we are all doing business in.

So with those as introductory remarks, Angela, perhaps we could now open the lines to questions.

Thank you.

(Operator Instructions)

We will now go to Wendy Nicholson with Citi Research.

Hi, I guess a couple things.

There's a lot there, Ian, in your final comments, but in terms of the macro slowdown, I think you commented that it happened, you know, very late in the second quarter.

And I guess that concerns me because outside of Brazil, you know, every region saw I think a deceleration in your organic sales growth, and at least came in below my expectations, and I have a hard time believing that that all happened very late in the quarter.

And in terms of going forward from here, how quickly do expect a pickup, how quickly do expect a reacceleration -- I guess specifically with regard to pricing and what you mentioned about commodity inflation, how quickly can you put some pricing in place so that even that tempered top line growth outlook is achievable at this point?

Thanks.

Yes, well obviously, Wendy, that is why I tried to make the introductory remarks because clearly from the early notes, those are exactly the questions on people's minds.

You know, if you track through the organic and focus on the emerging markets, we were actually quite pleased with the organic growth that we sustained in Latin America.

The big variation of course is in Asia, and clearly the world macros out there have been volatile and weak in some cases for a time, but beyond the adjustment we made in the first quarter, we had not seen that come through to our categories, and it did so in the second quarter and it did late in the second quarter.

The other factor, as I mentioned, was related to Hills and as I just said in my remarks, we've already seen that Hills bounce back.

The important point to make is that the underlying category growths are in that mid-single-digit range, as I said.

What you get from a volume point of view is that enlarged geographies, like in China, for example, with a very complex distribution system, you get an inventory reaction that works its way through the system that has a short term impact.

That was the impact we felt in the second quarter as we look forward at the consumption rates.

In other words, the consumer purchase rates -- with them in the mid-single-digits area and with the pricing plans we have clearly in place for the second half of the year, we feel comfortable with that more tempered organic volume growth for the entire company at the lower end of that 5% to 7% range.

So it's the underlying consumer purchasing that gives us confidence.

We will now go to Jason English with Goldman Sachs.

Good morning, folks.

Thanks for the question.

Sure.

Ian, you're now expecting sales at the low end of where you were; gross margins moving a little bit lower.

Maybe you could just walk us through a couple of the offsets that help you keep EPS sort of the midpoint of where you were still intact.

Well, we obviously have the restructuring program, which we have underway.

I talked about advertising; for the year as I said, the total commercial spend will be up and the advertising will be up on the year; on a ratio basis it will be more in line with the strong levels of last year.

And when you work all of that through, with the guidance we provided in the first quarter on the EPS, that brings in the year.

We will now go to Ali Dibadj with Bernstein.

I think it's unusual in [review] when you do these prepared remarks.

I'm just trying to figure out the severity of things.

Was it really that bad of a slowdown in the emerging markets?

And even if it is, you have historically been relatively immune to slowdowns we've seen in the past.

I want to know if you think that's changed for your business, or if it is that much worse, and in that context, secondarily, if you could talk about the double-digit constant currency earnings target for this year?

It sounds like you're not going to make that, so I just want confirmation of that.

And if it changes your view, given what you're seeing in the emerging markets right now, about this Company being a double-digit earnings Company over the next few years?

So to answer your second question, the growth this year is not double digits, so I confirmed that in a constant currency basis.

But it does not change our view, our strategic view, that for the longer-term this is a double-digit earnings Company.

As far as your comment on the prepared remarks and the slowdown on the top line, frankly, the only reason we elected to do it this way was because otherwise, what you do is you usurp somebody's question in order to make some opening comments, which seemed unfair.

So we simply thought it was cleaner to do it this way.

So I apologize if trying to be proper in the presentation created a sense that things were somehow bad, which we do not believe they are.

We do see a volatile world.

We have tried consistently in that volatile world to deliver the agility and the flexibility necessary to keep driving our business ahead of the market growth, which is why Bina spent so much time on the market shares, because our market shares are strong and growing in key markets.

So this is us just reacting to a deceleration in our marketplaces in order to outperform what we see now as the probable growth rates in our categories for the balance of this year, and we just wanted to be as clear as possible about that.

We will now go to Dara Mohsenian with Morgan Stanley.

Good morning.

Hey, Dara.

Ian, can you discuss your market share performance so far for the SAC anti-cavity toothpaste where it has been launched in incrementality to your business?

And then also on a related note, given the healthy innovation pipeline you pointed to, do you think you're investing enough in marketing here or you will you temper the marketing a bit given the top line dynamics out there?

Yes, I think Bina went through quite a few, in fact almost all of the market shares we have so far.

On Superior Anti-Cavity, and indeed it has been prominently incremental in the marketplaces we have gone to, so you're seeing share performance, I would say, in broad terms depending on when the markets were entered, between 1.5% and 5%.

Turkey, 1.5%.

Brazil, as Bina quoted.

Malaysia, 4%; Australia, 4%; New Zealand, approaching 5%.

Greece, over 2%; Norway, 3.5%, as Bina said; and Mexico, 3%.

Albeit, that is Scantrack data.

And you heard that the Mexico shares are back up over 80 and the Brazil share is at an all-time high of 72.

So the more important reading for us on Superior Anti-Cavity, frankly, is that the trial rate is building very nicely.

We have now 6-month data in.

And it is significantly ahead of the category average and the repeat rates are dead in line with premium category entries in the category.

So we are seeing it in the share, but more importantly, we're seeing it in the consumer behavior.

And on the support behind the new products, no.

You know, the levels of advertising spend, and I'm now talking the traditional below the line advertising, are at compared to our history, elevated levels.

They are in line with the strong levels we had last year.

They are clearly focused behind the innovation in terms of building awareness, getting recommendation, and we keep trying to stress this point, but it sometimes is difficult, I guess, to make the impression that part of our investment to build brands with consumers and generate trial of new products comes in activity that we do at the store level, and that activity is captured in trade spending.

So it doesn't go into the traditional advertising line.

But when you think of consumer purchasing behavior and the techniques available to you today at retail, it's an enormously important part of building brand and provoking trial purchase.

So we're managing very carefully between those two investment buckets, the traditional advertising and the overall commercial spending, to make sure -- the example I just gave on Superior Anti-Cavity -- that we are generating trial above category norms so that the repeat multiplies on a higher than normal trial base.

So the answer is we continue to believe we have a very well-balanced plan behind the innovation for the year.

And we will now go to Alice Longley with Buckingham Research Brokerage.

Hi, good morning.

Hey, Alice.

With your guidance for the year that organic sales growth will be at the lower end of 5% to 7%, it looks like you have to get some acceleration from the 4% in the second quarter to get there and you already talked about Hills.

Where else might we see some improvement -- maybe Latin America because those people won't be so glued to their TV sets, and maybe the US on innovation, but if you could just tell us more where we get improvement in the second half versus the second quarter, that would be good.

First, Alice, I would say that the prevailing rate you have to get to in the second half is pretty much what you would've delivered in the first half.

So, yes, there is the second quarter for 4% and as we look at the balance of the year, given the underlying consumption rate that I mentioned in the emerging markets and particularly in Asia, that would clearly be a business area where we would expect the organic growth to come back.

And as I commented on the Hills business, with the specific channel issue in the second quarter, which we're already seeing come back, we would expect to see that in Hills as well.

So if you were pointing to 2 particular areas, it would be those areas.

And who knows, we may get wild optimism in Europe.

And we will now go to Chris Ferrara with Wells Fargo.

Okay.

Thanks.

Hey, Ian.

I guess the question is how do you, how does your new view on the category growth dynamic affect your decisions on pricing, if at all.

Because I know at least one of your major global competitors has said that competitive levels in the markets are affecting their ability to price for currency, you've said that, you know, you expect more pricing in the back half.

But how does that work for you guys?

Would you now take less pricing than you would've thought than before?

Well, remember, Chris, when you think about pricing, what you're actually trying to do is get the average selling price up.

So there are many ways of doing that; list price is clearly part of it.

But there are many other techniques that we deploy strategically and tactically to elevate ASP.

Premiumization, changes in your promotional activity, so there are many techniques that we deploy and the reason we made the comment about the market shares in Mexico and the US is we got 1.5 pricing on the quarter and we have those market shares moving in the right direction.

Bina went through a whole host of other market shares that are moving in the right direction, and we think we have the ability to continue to take pricing, create pricing in the second half of the year, without impinging on that mid-single-digit organic growth rate, and innovation is an important part of that.

And we will now go to Bill Chappell with SunTrust.

Good morning.

Ian.

Just talking about capital allocation and looking with where the stock is today and going forward.

Is the EPS guidance I assume, assumes only the 3 million a quarter share repurchase, but would you look at deploying more in this environment and from -- were there other things out there that you are looking, that have a better return at this point?

Well, you know, that's a very broad question, Bill, I think -- I guess the way we have thought about capital allocation over the years, obviously, one pays a dividend.

Obviously, one has internal capital expenditure programs, which deliver consistently in our case beyond a 33% hurdle rate of return and, of course, the capital investment is elevated in periods when we go through restructuring.

So right now we're deploying a little bit more in capital expenditure than we have done historically, quite purposely, and then, of course, we buy back shares as we have done, and I would say our target is still in that $1.5 billion gross range for this year, and obviously, should an acquisition candidate present itself or should we find one in various parts of the world, then we would prefer to allocate the capital in that direction.

And I don't think, at least, so far, our thinking has changed in that regard.

And we will now go to Bill Schmitz with Deutsche Bank.

Good morning, Ian.

Hey, Bill.

Probably a tough question to answer, but did you figure out what is the source of the volume shortfall?

I mean, is it people buying less, is it fewer people entering the category?

Is it sort of the mixed mechanisms you've used in the past aren't working as effectively -- is there any way to triangulate those three?

Yes, I -- it's difficult, Bill, as we have over time got under the hood of that.

You see what people do is they exhaust their own personal pantries.

They literally try and squeeze the tube and make it last a little bit longer so that they can extend the time between purchase cycles.

And as we've seen sometimes for cash outlay reasons, instead of buying a bigger tube at a certain channel of trade they will go and buy a smaller tube in a different channel outlet.

So in terms of the consumer purchase, that is what we have historically seen has been the behaviors they adopt.

The direct correlation to volume, the point I was trying to make specific to Asia on this quarter, is from a selling in volume point of view, you then have the dislocation that that slowdown brings to a very complicated and interrelated distribution network, which sees some inventory adjustment, which is a short-term affect as everybody readjusts to the now lower consumer purchasing rate.

So you see it more sharply on the company volume in the short term, even though the underlying purchase that you will go back to, as I said, is still in that mid-single digit range.

We will now go to John Faucher, with JPMorgan.

Hey, John.

Thanks.

Good morning, Ian.

A little bit of a follow-up on Chris's question.

And then if we look at your pricing in Latin America, it's a lot lower than what we're seeing from a lot of these other companies.

And I'm not asking you to comment on their pricing as much, but can you talk about sort of how you're viewing real pricing in Latin America as we look forward?

And is this something where, you know, you are just not going to move as much relative to some of the FX pieces?

And then sort of further delving down into Venezuela on this, we have seen some companies talk about the margin caps etc.

Can you talk about where you feel you are from a margin standpoint in Venezuela and as we look to map that out ourselves.

Thanks.

Yes, well let me start with Venezuela.

You know, we've read all of the transcripts on the pricing caps, obviously, in Venezuela.

In our situation, virtually all of our business is capped, if you will, by the government's 2012 policy that prevents us from taking pricing in the marketplace.

And, therefore, because of that, the pricing cap doesn't really apply to us.

Margin cap, I mean.

So that would be the simple summary on Venezuela.

You probably saw or will see that we posted a modest profit this quarter and indeed for the half, which we had not done last quarter which is pleasing and we continue to manage that business with the diligence that you would expect.

And, you know, there have been quite a few press reports and indeed we are in very constructive discussion with the government about the opportunity for us to realize pricing on products as we continue forward in this year, and we will have to see where that ends up, but we do spend a lot of constructive time in discussion.

In terms of pricing in Latin America, actually, we're actually quite pleased with the pricing balance that we have been taking in Latin America at this time, remembering that there is no pricing in Venezuela.

So the overall pricing we're taking we think is both consistent, you look at the first and the second quarters, 6 and 5, and of course that will continue in the back half of the year and, of course, for our gross margin to improve, across the year we will have to see a like gross margin improvement in divisions including in Latin America so that is very much in our plan.

And I think the market shares talk to the fact that I think we're finding the right balance between the two.

We will now go to Olivia Tong with Bank of America Merrill Lynch.

Thanks.

You talked a lot about increased in-store activity but obviously volume was a little bit light of expectations, so do your analytics suggest that consumers are just not as a responsive to in-store activity as they used to be, or was it effective and volume would've been worse if not for the promotional activity?

And then also, it sounds like you're quite pleased with funding the growth and cost of progress overall, so what drove overhead up this quarter?

Thank you.

Okay.

A couple of answers there.

In terms of in-store activity, again, as I tried to example, I think you have to try and separate out, depending on the part of the world you're talking about, the slowdown in overall consumption and the short-term impacts that has on company volume.

So as I described before, you can have a situation where as the consumer consumption slows overall, you're still connecting with that consumer; let's pick the emerging market mid-single digit growth right now that we are talking about, but behind that, given the distribution system, as the volume readjusts to that lower level, you see company volumes slow in a shorter timeframe.

The consumer is just as responsive at the purchasing end to the in-store trial activities.

So the in-store activity continues to be effective from a consumption point of view.

And in terms of the overhead increase, it largely relates to distribution decisions we have taken in various parts of the world.

Either to take our products to market directly and not through a distributor, or to extend our distribution debt and therefore incur more logistic cost in order to get that distribution debt, both of those things being good in terms of building our brands over the medium term; so very conscious choices.

The underlying overhead is actually flat.

And will now go to Michael Steib with Credit Suisse.

Good morning, Ian.

Hey, Michael.

Just a follow-up question on the Latin American margin, please.

It was down over 20 basis points in the quarter.

Given your comments on the temporary effect on Brazil volumes in the quarter, but also pricing, do expect to be able to reverse that in the second half?

At least partially?

Yes, I mean, as I was trying to explain a little bit before, obviously, when you look at the impact in the second quarter, part of it is Venezuela and part of it is the lead lag between the very sharp increase in transaction impact on product cost and the ability to keep feathering pricing into the marketplace.

So as I tried to answer with the earlier question, we do have more pricing planned for the balance of the year and as we look at our gross margin ambitions for the company, you know, that will see gross margins expand in our divisions, including in Latin America.

So to your point, we will indeed see improvement in gross margin as the year unfolds in Latin America.

As indeed we saw improvement second-quarter to first.

And we will now go to Caroline Levy with CLSA.

This is Brian Doyle in for Caroline.

You sound very different, Caroline.

Yes, little bit.

We were just wondering how de-stocking usually lasts, and if it is limited to China at the moment or if there are other areas where it's affecting you?

It's predominantly China.

It tends to be relatively short-term.

I would say overall, 60 to 90 days.

Great.

Thanks very much.

And we will take our next question from Connie Maneaty with BMO capital markets.

Good morning.

I know it's a small market for you, but this morning there are headlines that Argentina is defaulting.

What impact would that have on you?

Yes, don't cry for me, Argentina, right?

Argentina as you may know, Connie, is less than 1% of the Company's sales.

You know, we manage these geographies as if they are a hyperinflationary so we do all the things -- even though we don't book it as hyper because it has not yet crossed the hundred so we hold little cash.

We have de minimis cash in Argentina.

We don't have any debt outstanding and we don't believe we have a need for any external funding.

We make most of our product locally, so as a direct impact of the default, no, no impact for us.

Now, of course, what the knock-on affects are terms of inflation and foreign exchange, we'll have to see how it unfolds and react accordingly, but I come back to the first point, that it is less than 1% of our sales.

And we will now go to Lauren Lieberman with Barclays.

Thank you.

Good morning.

Hey, Lauren.

Hello.

Just two quick things.

One was just following up on the 60 to 90 days for how long the destocking usually lasts.

You said some of the weakness popped up at the end of the quarter, so should I interpret that as there is still a little bit more to go in 3Q or that you continue to see that in July, but you would expect as you get into August, September things start to improve?

That would be a correct assessment.

Okay.

Great.

And then the final thing would just be if you could run through the gross margin bridge for us, that would be great.

I thought you'd never ask.

So in terms of gross profit, prior year gross profit was 58.6%, with the pricing we took we got 50 basis points from that.

Between our funding, the gross savings and the modest contribution, as in the first quarter, from restructuring, our total funding growth the restructuring was 220 basis points.

Actually, slightly ahead of the 210 we got in the prior year.

Material prices were a headwind of 250 and so with the pricing and the funding the growth, that is what leads you to the 58.8% or 20 basis point increase year-on-year.

And we will and now go to Javier Escalante with Consumer Edge Research.

Hi, good morning, Ian and Bina.

I don't think that you clarified the situation with Hills in the specialty stores; if you can elaborate what was this temporary dislocation.

You mentioned that it was resolved but just curious if you can tell us what happened there.

And then on pricing, again, shall we expect pricing to improve in emerging markets or it is just a reduction of promotional activity in Europe given the strong volumes?

Thank you.

To answer your latter point, first, Javier, no it is not a reduction in promotion in Europe which drives that.

It is pricing and it is pricing across the world with a heavy emphasis on the emerging markets and continued emphasis on Hills.

And in terms of Hills, I'm sorry if I made it sound like some sort of untoward event.

They had a traffic slowdown in their stores and as we have come into this quarter, with our innovation and with the activity we have behind our innovation, that for us has gone away and we have kicked off to a nice start in the third quarter.

So just a temporary blip.

And will now go to Steve Powers with UBS.

Hey, Ian.

I was wondering if you could just break apart the drivers of the change in your gross margin outlook between January and July, really I guess between April and July.

How much of the reduction has been driven by a decision to move demand building dollars from ad spend to trade spend versus some of the other factors you mentioned like FX, commodity inflation, the general slowdown that you've experienced etc?

That would help.

Thanks.

Yes, I don't really want to get into that sort of level of detail and I would say in terms of rebuilding our gross margin it's basically between the materials and the transactions.

So that's where our focus is.

And we will now turn to Alec Patterson with AGI.

I'm sorry, I need to follow-up on that last question.

Just trying to understand; you're saying the material costs are the material -- is the main change versus where you were in April?

Or is it more a function of promo spending that is up to offset, I presume, increased pressure on the categories?

Especially emerging markets?

Clearly, when you do the investment at store, that investment in that store brings pressure on gross margin, but we have had that thinking in our plan.

So the new aspect is an increase in material prices and a, shall we say, heightened impact from transactions.

And we will take our final question from Mark Astrachan with Stifel.

Thanks, and good afternoon now.

Curious on your thoughts on Hills, given the slowdown you talked about in the specialty stores and do you think there is an opportunity to expand distribution and is there even a benefit in doing so beyond just that channel?

And then just more broadly curious, your thoughts on growth rates in that business or in pet nutrition sort of broadly in Europe, US, and sort of your views on longer-term opportunities and developing markets as something that eventually will be bigger than it is today.

Yes, the answer to the distribution question, which has been asked many times, is given the model we have for that business, we do not believe that that would be to advantage.

That is rather the recommendation we cultivate with veterinary professionals is best maintained in a controlled environment, whether it's a pet store, a Petsmart or a Petco where the assistants can advise, or indeed directly with the vet.

That is part of the connection that brand has with the consumer; if you were then to liberalize that, and take it more broadly, into if you will a grab and go environment, you lose that connection.

To your second point, you are absolutely right, Hills today is predominantly a developed-world business.

We have a very clear focus on a handful of emerging markets, where we are seeing a most immediate potential for that growth; but indeed, part of the attractiveness of the business is the long runway we see in terms of the emerging markets coming into the fold and providing sustainable growth for the long-term.

So those are all the questions for today.

I thank everyone very much for joining.

I thank all the Colgate people for contributing so hard to the results that we deliver, and we look forward to catching up with everybody again after the third quarter.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation.